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February 3, 2011

Office of Regulations and Interpretations

Employee Benefits Security Administration

Attn: Definition of Fiduciary Proposed Rule

Room N-5655

U.S. Department of Labor

200 Constitution Avenue, NW

Washington, DC 20210

Re:

Dear Sir or Madam:

Application of ERISA Fiduciary Rules to Proxy Advisory Firms

Business Roundtable appreciates the opportunity to present comments to 

the Employee Benefits Security Administration (“EBSA”) in connection with 

the proposed regulations that would amend the definition of “fiduciary” 

under the Employee Retirement Income Security Act of 1974, as amended 

(“ERISA”). For the reasons identified below, Business Roundtable strongly

urges EBSA to confirm that ERISA fiduciary status applies to firms that 

provide proxy voting services to ERISA plans, either through any final 

regulations or pursuant to other guidance of general applicability.

At the same time, we stress that many other aspects of EBSA's proposed 

regulations will have profound and potentially detrimental consequences for 

retirement savings plans and their participants. In light of those myriad 

concerns and the importance of those issues, EBSA should not act 

precipitously. Rather, a robust and extended dialogue with the private sector 

and with other governmental agencies is needed. Most notably, we urge 

EBSA to coordinate its review with the ongoing and overlapping regulatory 

projects currently in process at the Securities and Exchange Commission 

(SEC) and the Commodities Futures Trading Commission (CFTC). 

Background – Business Roundtable

Business Roundtable is an association of chief executive officers of leading 

corporations with a combined workforce of more than 12 million employees 

in the United States and nearly $6 trillion in annual revenues. Member 

companies comprise nearly a third of the total value of the U.S.

Ivan G. Seidenberg

Verizon Communications

Chairman

Kenneth I. Chenault

American Express Company

Vice Chairman

Edward B. Rust, Jr.

State Farm Insurance Companies

Vice Chairman

John Engler

President

Larry D. Burton

Executive Director

Johanna I. Schneider

Executive Director

External Relations
February 3, 2011

Page 2

stock markets and more than 60 percent of all corporate income taxes paid to the federal 

government. Annually, they pay $167 billion in dividends to shareholders and the economy.

ERISA and Proxy Voting

EBSA’s longstanding position, as expressed in Interpretive Bulletin 94-2 (and updated in 

Interpretive Bulletin 2008-2), is that proxy voting is subject to ERISA’s fiduciary responsibility 

rules. As outlined in Interpretive Bulletin 2008-2, the fiduciary act of managing plan assets that 

are shares of corporate stock includes the voting of proxies appurtenant to those shares of 

stock. The duty to vote proxies lies with the plan trustee unless, inter alia, “the power to 

manage, acquire or dispose of the relevant assets has been delegated by a named fiduciary to 

one or more investment managers” pursuant to section 403(a)(2) of ERISA. When the authority 

to manage plan assets has been delegated to an investment manager, “no person other than 

the investment manager has authority to vote proxies appurtenant to such plan assets except 

to the extent that the named fiduciary has reserved to itself (or to another named fiduciary so 

authorized by the plan document) the right to direct a plan trustee regarding the voting of 

proxies.” In addition, if the plan document or the investment management agreement does 

not expressly preclude the investment manager from voting proxies, the investment manager 

has the exclusive responsibility for proxy voting. An investment manager is not relieved of its 

own fiduciary responsibilities by following directions of some other person regarding the voting 

of proxies, or by delegating such responsibility to another person. 

Interpretive Bulletin 2008-2 describes the applicable fiduciary’s responsibilities in voting proxies 

as follows:

The fiduciary duties described at ERISA Sec. 404(a) (1) (A) and (B), require that, in voting 

proxies, regardless of whether the vote is made pursuant to a statement of investment 

policy, the responsible fiduciary shall consider only those factors that relate to the 

economic value of the plan’s investment and shall not subordinate the interests of the 

participants and beneficiaries in their retirement income to unrelated objectives. Votes 

shall only be cast in accordance with a plan’s economic interests. If the responsible 

fiduciary reasonably determines that the cost of voting (including the cost of research, if 

necessary, to determine how to vote) is likely to exceed the expected economic benefits of 

voting, or if the exercise of voting results in the imposition of unwarranted trading or other 

restrictions, the fiduciary has an obligation to refrain from voting. In making this 

determination, objectives, considerations, and economic effects unrelated to the plan’s 

economic interests cannot be considered. 

Thus, EBSA has long recognized the importance of proxy voting for stocks held by ERISAcovered plans, and the possible impact of such voting on the value of the plans’ investments.
February 3, 2011

Page 3

Proxy Advisory Services – Background and Concerns

Use of Proxy Advisory Services by ERISA Investment Managers

The fiduciaries responsible for voting the proxies for securities held by ERISA plans -- most 

typically, investment managers under section 3(38) of ERISA -- often hire third-party proxy 

advisory firms to help them vote the plan’s proxies in shareholder elections. These firms offer 

vote recommendations -- or, in some cases, are given direct voting authority -- on corporate 

director elections, as well as on company and shareholder proposals. 

Many ERISA investment managers -- particularly midsize and smaller investment managers -- do 

not have in-house staff, or have limited in-house staff, to analyze and vote on proxy items, and 

so they outsource their voting decisions to proxy advisory firms or, in some cases, they 

generally adopt the voting policies developed by one or more of the advisory firms. 

Outsourcing of proxy voting decisions may result in a “one-size-fits all” approach that does not 

encourage voting decisions to be reached on a case-by-case basis, taking into account the 

particular circumstances of a company. This creates a substantial risk that proxy votes by ERISA 

plan investment managers may not “be cast in accordance with a plan’s economic interests.”

In addition, in some cases, these proxy advisory firms work with their clients to develop unique 

voting guidelines that are applied by the advisory firms, as a part of the services provided. In 

other cases, the investment manager clients accept the voting guidelines or policies developed 

by the proxy advisory firms. While an individual proxy advisory firm may receive input from its 

clients in the development of a particular voting policy, the reality is often that the proxy 

advisory firm suggests the policy, and voting patterns at companies suggest that many ERISA 

plan investors (as well as other institutional investors) vote according to those policies. 

Concerns with Proxy Advisory Firms

In 2006, the New York Stock Exchange Proxy Working Group released a report on the proxy 

processing system.1

As a part of its analysis of the proxy system, the Working Group heard a great deal of 

concern expressed about the increasing role and influence of shareholder voting advisory

services in the proxy system. These services often have multiple roles in the proxy process, 

including advising issuers on various governance issues, making recommendations to 

institutions and other shareholders on how to vote and actually voting the shares of 

numerous institutions that choose to outsource their voting decisions. In light of these 

concerns, the Working Group recommends that the NYSE request the SEC to study the role 

these groups play in the proxy voting process.

One of the recommendations of the Working Group was a request that the 

Securities and Exchange Commission (“SEC”) study the role of proxy advisory firms on account 

of their growing power over the voting of corporate shares in the United States: 

 

1 Report and Recommendations of the Proxy Working Group to the New York Stock Exchange, June 5, 2006, p. 

29, available at http://www.nyse.com/pdfs/PWG_REPORT.pdf.
February 3, 2011

Page 4

More recently, the NYSE Commission on Corporate Governance released a final report on core 

corporate governance principles.2 With respect to proxy advisory services, the Commission 

stated as follows:

Although many large investors use proxy advisory services primarily as a source of 

information and research, that is not necessarily the practice of all institutional investors, 

and there is an increased level of concern regarding the impact of advisory firms. As a 

result, the Commission believes that the SEC should engage in a study of the role of proxy 

advisory firms to determine their potential impact on, among other things, corporate 

governance and behavior and consider whether or not further regulation of these firms is 

appropriate. At a minimum, such firms should be required to disclose the policies and 

methodologies that the firms use to formulate specific voting recommendations, as well as 

all material conflicts of interest, and to hold themselves to a high degree of care, accuracy 

and fairness in dealing with both shareholders and companies by adhering to strict codes of 

conduct. The advisory services should also be required to disclose the company’s response 

to its analysis and conclusions.

The widespread use of proxy advisory services by ERISA plans and other institutional investors 

has resulted in these firms having a significant impact on shareholder voting. However, proxy 

advisory firms remain largely unregulated, are not fully transparent about their methodologies 

and decision-making processes, and some of their reports contain errors and inaccuracies. 

Unfortunately, many proxy advisory firms are not subject to any or limited regulatory oversight, 

required disclosures, or fiduciary obligations regarding their ability to control or influence the 

outcome of shareholder votes at public companies in the United States. 

Proxy advisory firms may significantly influence many director elections and corporate actions, 

as their institutional clients -- primarily mutual funds and pension plans --have large stock 

holdings compared to other investors. This influence has increased, and will continue to 

increase, with the recent change to New York Stock Exchange (NYSE) Rule 452, regarding broker 

discretionary voting.3

At least one proxy advisory firm – RiskMetrics4

 

2 http://www.nyse.com/pdfs/CCGReport.pdf.

-- provides corporate governance and executive 

compensation consulting services, in addition to providing voting recommendations on 

3 On July 1, 2009, the SEC approved an amendment to NYSE Rule 452 that will prohibit brokers from having the 

discretion to vote uninstructed shares of beneficial owners in uncontested director elections. In addition, 

Section 957 of the Dodd-Frank Wall Street Reform and Consumer Protection Act further limits discretionary 

voting by brokers. It requires all national securities exchanges to adopt standards prohibiting discretionary 

broker voting in elections, as well as in connection with executive compensation or any other “significant 

matter,” as determined by SEC rulemaking. The NYSE submitted a revised Rule 452 to the SEC on September 

on August 26, 2010, which was approved by the SEC on September 9, 2010. The SEC approved a similar 

change by the Nasdaq on September 21, 2010.

4 RiskMetrics was recently acquired by MSCI Inc., a publicly-traded company that formerly was part of Morgan 

Stanley. In 2009, “[d]despite the challenges we faced, I am pleased to report that [MSCI was] able to generate 
February 3, 2011

Page 5

proposals submitted in shareholder elections. For example, RiskMetrics offers a consulting 

service to help companies determine if their equity plans meet RiskMetrics’ approval criteria; 

and it provides a service to evaluate “corporate sustainability,” which involves a review of 

certain environmental and social issues facing a company. This may create conflicts of interest 

between RiskMetrics’ servicing of its institutional clients and the corporate consulting services 

it also provides. In addition, a conflict of interest affecting all proxy advisory firms may arise 

when a client of a proxy advisory firm is also the proponent of a shareholder proposal -- or 

instigates a “vote no” campaign against directors or a company proposal-- that will be subject 

to a voting recommendation by that same proxy advisory firm. 

Proxy advisory services also vary in their approaches to providing companies with the 

opportunity to review draft reports to correct errors and inaccuracies. Some services provide 

certain issuers with draft reports to review on expedited time schedules, while others will not 

even speak with company representatives. They also vary in their practices with respect to the 

issuance of revised reports to notify their institutional clients of changes in their 

recommendations.

Academic Studies of the Proxy Voting Service Industry

A number of academic studies and reports have been conducted on the proxy advisory 

industry. Some of these studies and reports have been critical of the “one-size-fits-all” 

governance ratings that are used by some of the proxy advisory firms to evaluate corporate 

performance.

5

Other studies and reports identify problems within the proxy advisory industry, and 

recommend policy and regulatory solutions. For example, the Millstein Center for Corporate 

Governance and Performance at the Yale School of Management has developed two policy 

briefing papers about the proxy advisory industry. These policy papers contain 

recommendations for addressing conflicts of interest and other problems with the current 

structure of the industry: 

 

record revenues and profits, adding another year to our long history of consecutive annual revenue growth.” 

MSCI Annual Report 2009, available at

http://files.shareholder.com/downloads/MSCI/964469765x0x356730/D4544168-EE59-4839-BD8E41C4F2A44763/2009_Annual_Report.pdf. 

5 Two of the more prominent papers and studies on this subject are: (a) Sanjai Bhagat, Brian Bolton and Roberta 

Romano, The Promise and Peril of Corporate Governance Indices, 108 Colum. L. Rev. 1803 (2008), available 

at http://www.columbialawreview.org/assets/pdfs/108/8/Bhagat__Bolton___Romano.pdf (concluding that 

there is no consistent relationship between corporate governance indices and future corporate performance 

and that the most effective approaches to governance depend on context and a company’s specific 

circumstances); and (b) Robert Daines, Ian Gow and David Larcker, Rating the Ratings: How Good Are 

Commercial Governance Ratings?, Arthur and Toni Rembe Rock Center for Corporate Governance, (2008), 

available at http://www.gsb.stanford.edu/cldr/cgrp/documents/dgl6-26-2008.pdf (concluding that the level of 

predictive validity of corporate governance ratings is well below the threshold necessary to support claims 

about the ability of ratings to predict future corporate performance and risk).
February 3, 2011

Page 6

• Voting Integrity: Practices for Investors and the Proxy Industry. This 2008 working draft 

by Millstein Center Visiting Research Fellow Meagan Thompson-Mann discusses the 

processes by which investors make voting decisions and provides a draft code of 

professional practices for the proxy advisory industry.6

• Voting Integrity: Practices for Investors and the Global Proxy Advisory Industry. On 

March 2, 2009, a second paper7

In addition, other recent academic papers released highlight the lack of accountability and 

oversight enjoyed by the proxy advisory industry under current rules.

was released by the Millstein Center on the practices of 

the proxy advisory industry. This paper recommended the development of an industrywide code of ethics and urged the SEC to take steps to modernize the U.S. proxy voting 

system.

8

Recommendations

These academic papers 

highlight the need for improved regulatory oversight and transparency of proxy advisory firms.

Proxy advisory firms that provide voting recommendations to ERISA investment managers and 

other fiduciaries responsible for voting proxies should be subject to more robust oversight by 

EBSA. We urge EBSA to confirm that ERISA fiduciary status applies to entities that provide 

proxy voting services, either through final regulations or other guidance of general applicability. 

EBSA also should issue guidance addressing the implications under section 406(b) of ERISA if a 

proxy advisory firm offers consulting services to any public company for which it is providing 

recommendations on how ERISA plan fiduciaries should vote the shares held by ERISA plans. 

Additionally, EBSA should issue enhanced guidance regarding the duties of ERISA investment 

managers and other fiduciaries responsible for proxy voting decisions. Such guidance should 

emphasize their oversight responsibilities with respect to any delegation, express or implied, of 

their voting rights to a proxy advisory firm. As a part of their due diligence process for making 

proxy voting decisions, ERISA fiduciaries should use, whenever appropriate, methodologies that 

evaluate the facts and circumstances of each public company and avoid “one-size-fits-all” or 

“check the box” methodologies. This would increase the likelihood that ERISA fiduciaries are 

 

6 Millstein Center for Corporate Governance and Performance, Policy Briefing No. 2/Voting Integrity: Practices 

for Investors and the Proxy Industry (June 5, 2008), available at 

http://millstein.som.yale.edu/2008%2006%2005%20voting%20integrity2.pdf.

7 Millstein Center for Corporate Governance and Performance, Policy Briefing No. 3/Voting Integrity: Practices 

for Investors and the Global Proxy Advisory Industry (March 2, 2009), available at 

http://millstein.som.yale.edu/Voting%20Integrity%20Policy%20Briefing%2002%2027%2009.pdf (hereinafter 

“Millstein Policy Briefing No. 3”).

8 See Tamara C. Belinfanti, The Proxy Advisory and Corporate Governance Industry: The Case for Increased 

Oversight and Control, 14 Stan. J.L. Bus. & Fin. 384 (2009); and Stephen Choi, Jill Fisch and Marcel Kahan, 

Director Elections and the Role of Proxy Advisors, 82 S. Cal. L. Rev. 649 (2009), available at 

http://weblaw.usc.edu/why/students/orgs/lawreview/documents/ChoiforWebsite.pdf.
February 3, 2011

Page 7

meeting their responsibilities outlined in Interpretive Bulletin 2008-2 and that they are acting in 

accordance with the economic interests of the plan.9

In addition, we urge EBSA to coordinate its review of the proposed regulations with ongoing 

and overlapping regulatory projects at SEC and the CFTC. We note that the Executive Order 

issued by the President on January 18, 2011, requires coordination, not simply notifying other 

agencies of pending projects. The Order decries regulatory requirements that are “inconsistent 

or overlapping” and requires agencies to attempt to promote “coordination, simplification, and 

harmonization.” Significantly, the January 2011SEC staff study addressing fiduciary issues with 

respect to investment advisers and broker-dealers, specifically concludes that the existence of 

differing standards harms and confuses investors. Similarly, the CFTC's December 22, 2010 

proposed rules on business conduct for swaps have a significant interaction with EBSA's 

proposed regulations that could deny some defined benefit plans access to this important tool 

for managing investment and liability risks. 

On behalf of Business Roundtable, we again thank you for the opportunity to comment on the 

application of ERISA’s fiduciary rules to proxy advisory services and other issues raised by 

EBSA's proposed regulations on the fiduciary definition. We are happy to discuss these issues 

at your convenience.

Sincerely,

John Engler

 

9 Of course, an individual who merely takes direction and passes along, unchanged, the yeas and nays should not 

be treated as a fiduciary for this purpose since they are simply acting as a conduit without the ability to 

influence the action.